UK Inheritance Tax Rules (2026/27)

Inheritance Tax is charged at 40% on the part of an estate above the nil-rate bands when someone dies, and on some gifts made in the 7 years before death. For 2026/27 the bands are the £325,000 nil-rate band and the £175,000 residence nil-rate band, both frozen until April 2031. This guide covers the bands, the rates, the 7-year rule, the exemptions, Business and Agricultural Relief after the April 2026 changes, pensions from April 2027, the long-term residence test, and four worked examples computed by our Inheritance Tax calculator. It is general information based on GOV.UK, HMRC and legislation.gov.uk, not advice on any particular estate.

1. Overview of UK inheritance tax

The rules are in the Inheritance Tax Act 1984, as amended. The estate - property, money and possessions, less debts - is valued at the date of death. The nil-rate band, the residence nil-rate band where a home passes to direct descendants, and any bands transferred from a spouse or civil partner who died first are deducted, and the rest is taxed at 40%. Everything left to a spouse, civil partner, charity or community amateur sports club is exempt (GOV.UK).

Since 2024 the main changes are: from 6 April 2025, worldwide scope depends on long-term UK residence rather than domicile; from 6 April 2026, 100% Business and Agricultural Relief is limited to a £2,500,000 allowance; and from 6 April 2027, most unused pension funds come into the estate. Each has its own section below.

2. The nil-rate bands and taper threshold

Nil-rate band. £325,000 per person, at that level since 6 April 2009 and frozen until April 2031.

Residence nil-rate band. Up to £175,000 where the person's home, or a share of it, passes to direct descendants. GOV.UK defines these as children, grandchildren and other lineal descendants and their spouses or civil partners, including step-children, adopted and fostered children and children for whom the person was a guardian; nephews, nieces and siblings do not count. The band cannot exceed the value of the home inherited, and an unused part cannot be set against other assets, though it can pass to a spouse (GOV.UK).

Taper. The residence band falls by 1 pound for every 2 pounds the estate is worth over £2,000,000. The estate value for this test is all assets less debts, with no deduction for exemptions or reliefs such as the spouse exemption or Business Relief. A single £175,000 band is gone at £2,350,000; a survivor's own band plus a transferred one at £2,700,000. Taper on the first death also reduces how much residence band can transfer.

Transfers between spouses. The unused percentage of each band on the first death is added to the survivor's bands, up to £1,000,000 in total. The claims are made on form IHT402 (nil-rate band) and IHT436 (residence band), within 2 years of the end of the month of the survivor's death or, if later, 3 months after the personal representatives start acting (IHTA 1984 s.8B and s.8L).

Downsizing. If the person sold or downsized their home, a downsizing addition can preserve some of the residence band, provided other assets pass to direct descendants (IHTA 1984 s.8FA onwards). It is claimed with the residence band on form IHT435.

3. The 40% standard rate and 36% reduced rate

Standard rate. 40% on the value above the available bands. Gifts into most trusts are charged at 20% when made (IHTA 1984 s.7(2)).

Reduced rate. 36% applies where charitable gifts are at least 10% of the "baseline amount" (IHTA 1984 Schedule 1A). HMRC's three steps: take the value of the estate, deduct the available nil-rate band (including any transferred band), then add back the charitable legacy (IHTM45009). The residence band is not deducted, so the 10% is measured on a larger figure than the taxable estate. Example D below shows that the reduced rate makes a legacy cheaper for the family but does not leave them better off.

Trusts. Most discretionary trusts and interest-in-possession trusts created after 22 March 2006 hold "relevant property". They pay a charge on each 10-year anniversary and exit charges when property leaves, which GOV.UK says are at most 6% (GOV.UK). Trusts need specialist advice.

4. The 7-year gift rule and taper relief

A gift to another individual is a potentially exempt transfer (PET). Nothing is due when it is made. If the giver lives 7 years, it is outside the estate. If they die sooner, its value at the date of the gift is counted, using the nil-rate band before the estate does, oldest gift first.

Taper relief then reduces the tax on any gift above the band according to how long before death it was made (IHTA 1984 s.7(4); IHTM14612):

• Less than 3 years: no taper, 40%
• 3 to 4 years: 20% taper, effective rate 32%
• 4 to 5 years: 40% taper, effective rate 24%
• 5 to 6 years: 60% taper, effective rate 16%
• 6 to 7 years: 80% taper, effective rate 8%
• 7 years or more: no tax on the gift

Taper only helps above the band. GOV.UK says taper applies only where gifts in the 7 years before death add up to more than the nil-rate band. Ignoring annual exemptions, a single £400,000 gift made 4 to 5 years before death leaves £75,000 above the band, taxed at 24%: £18,000, payable by the recipient. The gift also uses the whole band, so the rest of the estate is taxed from the first pound (after any residence band).

Several gifts. Each later gift uses whatever band the earlier ones left, and taper is worked out for each gift by its own date. Gifts all made within 3 years of death get no taper at all, whatever their order.

The 14-year look-back. A chargeable lifetime transfer made in the 7 years before a PET is counted when working out the tax on that PET if it fails, so gifts up to 14 years before death can matter. Keep records of what you gave, to whom, its value and the date.

5. PETs versus CLTs

Potentially exempt transfers. A gift to another individual (including into a bare trust, where the beneficiary owns the property), or into a disabled trust or certain trusts for bereaved minors (IHTA 1984 s.3A). No tax and no report when made. If the giver dies within 7 years and the gifts exceed the band, the recipient pays the tax; GOV.UK puts it that anyone who received a gift in those 7 years pays on their gift once more than £325,000 has been given away.

Chargeable lifetime transfers. A gift into most other trusts. Tax of 20% is due at the time on the value above the giver's available band if the trustees pay; if the giver pays, the loss to their estate and therefore the tax is larger (GOV.UK). If the giver dies within 7 years the transfer is recharged at 40% with taper, and the lifetime tax is credited but never repaid (IHTA 1984 s.7(4)-(5)).

Cumulation. Chargeable transfers in the 7 years before a transfer reduce the band available to it (IHTA 1984 s.7(1)), so a series of trust gifts uses the band up.

Exempt transfers. Gifts to a spouse or civil partner (s.18), to charities and registered clubs (s.23), to a political party that at the last general election had two MPs elected, or one MP and at least 150,000 votes (s.24), and to housing associations (s.24A) are exempt and do not count towards the 7-year total.

6. Annual gift exemptions

Annual exemption. £3,000 per giver per tax year, with any unused part carried forward one year only (IHTA 1984 s.19). A married couple each have their own.

Small gifts. Gifts to any one person in a tax year are exempt if their total is no more than £250 (s.20). It is all or nothing per person: £200 in spring plus £100 in autumn to the same person is £300, so none of it qualifies (the annual exemption could cover it instead). GOV.UK adds that the small gift allowance cannot be used on someone who has received another allowance from you.

Wedding and civil partnership gifts (s.22), per giver per marriage:

• £5,000 from a parent of either party
• £2,500 from a grandparent or other remoter ancestor, or from one party to the other
• £1,000 from anyone else

GOV.UK says the gift must be given on or shortly before the wedding, and the exemption does not apply if the wedding is called off. Any excess over the limit is an ordinary gift.

Normal expenditure out of income. No limit, if the gifts are part of your normal expenditure, are made out of income taking one year with another, and leave you enough income to maintain your usual standard of living (s.21). GOV.UK gives examples such as paying a child's rent or supporting an elderly relative. Keep records showing the income and the pattern.

Family maintenance. A payment by one spouse or civil partner for the maintenance of the other, or for a child's maintenance, education or training until 18 or the end of full-time education, is not a transfer of value at all (IHTA 1984 s.11).

7. Spouse and charity exemptions

Spouses and civil partners. Exempt with no limit, in life and on death (IHTA 1984 s.18). Unmarried partners have no exemption.

Spouse who is not a long-term UK resident. Since 6 April 2025, if the giver is a long-term UK resident and the recipient is not, the exemption is capped at the nil-rate band, currently £325,000 (s.18(2)). The recipient can elect to be treated as a long-term UK resident (s.267ZC), which removes the cap but brings their worldwide assets into scope.

Charities. Gifts to charities and registered community amateur sports clubs are exempt (s.23). For transfers from 1 April 2024 a charity must be subject to the jurisdiction of a UK court, so EU and EEA charities no longer qualify (Finance Act 2010 Schedule 6, as amended by Finance (No. 2) Act 2023 s.344).

8. BPR, APR and the £2.5m allowance from April 2026

Business Relief. 100% on a business or an interest in a business and on shares in an unlisted company; 50% on shares controlling more than 50% of the votes in a listed company and on land, buildings or machinery used in a business the person controlled or was a partner in. The assets must have been owned for at least 2 years. Businesses mainly dealing in securities, land or buildings or making or holding investments do not qualify (GOV.UK; IHTA 1984 s.105).

Agricultural Relief. On agricultural land and buildings, including farmhouses and cottages of a nature and size appropriate to the farming, valued at agricultural value only. The land must have been occupied for farming by the owner for 2 years, or owned for 7 years and farmed by someone else. The rate is 100% where the owner farmed it, it was used on a short-term grazing licence, or it was let on a tenancy that began on or after 1 September 1995, and 50% in most other cases. Land under an environmental land management agreement can qualify (GOV.UK).

The £2,500,000 allowance. For deaths from 6 April 2026, 100% relief on qualifying business and agricultural property combined is limited to £2,500,000; the excess gets 50%, an effective rate of 20%. The allowance is reduced by 100% relief already given on chargeable transfers in the previous 7 years (IHTA 1984 s.124D(2)), and qualifying gifts made from 30 October 2024 count if the giver dies within 7 years. An unused allowance can pass to a surviving spouse or civil partner, up to £5,000,000 for a couple; if the first death was before 6 April 2026 a full allowance is assumed. On death the allowance is shared across the qualifying property in proportion to value (s.124D(7)).

AIM shares. Shares on markets HMRC treats as "not listed", such as AIM, get 50% relief in all cases from 6 April 2026 and cannot use the allowance. Someone with £2,000,000 of farmland and £500,000 of AIM shares therefore covers the farmland within the allowance while the AIM shares get 50%.

HMRC estimates that up to 1,100 estates will pay more in 2026-27, and that around 85% of estates claiming Agricultural Relief will pay no more than before (policy paper). Tax on assets inherited from 6 April 2026 that qualify for either relief can be paid in 10 interest-free yearly instalments (GOV.UK).

9. Pensions inside IHT from April 2027

Until 6 April 2027 most unused pension funds are outside the estate. From that date most unused pension funds and pension death benefits are brought into the estate, under provisions enacted in Finance Act 2026. The personal representatives, not the pension scheme, are liable for reporting and paying the tax, and can in some cases direct the scheme to withhold benefits and pay the tax (GOV.UK).

What stays outside. Death-in-service benefits from registered pension schemes, and dependants' scheme pensions from defined benefit or collective money purchase arrangements. Pension benefits passing to a surviving spouse, civil partner or charity keep their exemption.

HMRC estimates that of around 213,000 estates with inheritable pension wealth in 2027-28, 10,500 will have a liability where previously they would not, and about 38,500 will pay more. If you have a pension you were keeping as an asset to pass on, see our April 2027 pensions guide and pension IHT calculator.

10. The long-term residence test from April 2025

From 6 April 2025, whether Inheritance Tax reaches worldwide assets depends on long-term UK residence, not domicile. A person is a long-term UK resident in a tax year if they were UK resident for at least 10 of the previous 20 tax years (IHTA 1984 s.6A). GOV.UK puts the reverse: you are treated as based abroad, and taxed only on UK assets, if you have lived in the UK for less than 10 years in the last 20.

Leaving the UK. Status is lost after a run of non-resident years that depends on how long the person was resident: 3 years for 13 or fewer resident years, rising to 10 for 20 resident years (s.6A(2)-(3)). Residence is decided by the statutory residence test, so see our residence guide. For deaths on or before 5 April 2025 the old domicile and deemed-domicile rules apply. Trusts and transitional cases need specialist advice.

11. Four worked examples

Example A: single, £450,000 estate

A single person leaves £450,000, including a flat worth £180,000, to their daughter. The flat is worth more than the £175,000 residence band, so the band is £175,000 in full. Applying it first, as GOV.UK does, leaves £275,000, covered by the nil-rate band. Tax due: £0. £50,000 of nil-rate band is unused; had the person been married, it could pass to the surviving spouse.

Example B: single, £750,000 estate

A widowed homeowner with no transferable bands leaves £750,000, including a £400,000 home, to two children. Both bands apply in full: taxable estate £250,000, tax at 40% £100,000.

Example C: taper, £2,400,000 estate

A single person leaves £2,400,000, with the home to their children. The estate is £400,000 over the taper threshold, which removes up to £200,000 of residence band, more than the whole £175,000. Only the nil-rate band applies: taxable estate £2,075,000, tax £830,000, an effective rate of 34.6%.

Example D: the 36% rate, £1,200,000 estate

A single person leaves £1,200,000, including a £300,000 home to their child. Without a charity legacy the taxable estate is £700,000 and the tax £280,000. The baseline amount is the estate less the nil-rate band, £875,000, so the legacy needed is £87,500. With it, the taxable estate is £612,500 at 36%: tax £220,500. The tax falls by £59,500, the charity gets £87,500, and the family receives £892,000 instead of £920,000, £28,000 less. The reduced rate pays for part of the gift, not all of it.

12. Anti-avoidance, GROBs and POAT

Gifts with reservation. If you give something away but keep benefiting from it - GOV.UK's examples are living in a home you gave to a relative, using a caravan you gave away for free holidays, or keeping a painting you gave away on your wall - it still counts as part of your estate (Finance Act 1986 s.102), and the 7-year rule does not apply. To keep living in a home you have given away you need to pay rent at the going rate and your share of the bills, unless you gave away only part of it and the new owners live there too (GOV.UK).

Pre-owned assets. An income tax charge from 2005-06 on people who benefit from property they used to own, or helped buy, in ways the reservation rules do not catch (Finance Act 2004 s.84 and Schedule 15). A person can elect instead to have the property treated as part of their estate.

General Anti-Abuse Rule. The GAAR in Finance Act 2013 Part 5 applies to Inheritance Tax as well as the other main taxes and can counteract abusive arrangements.

13. IHT400, deadlines and interest

Deadlines. Inheritance Tax on death is due 6 months after the end of the month of death (IHTA 1984 s.226). The IHT400 account must be delivered within 12 months of the end of the month of death (s.216(6)), but where tax is owed GOV.UK says you cannot apply for probate until it has been sent, and you usually have to pay some tax before probate is granted.

Interest. HMRC charges late payment interest at Bank of England base rate plus 4 percentage points from 6 April 2025; for Inheritance Tax it is 7.75% from 9 January 2026 on HMRC's published table, and it moves when base rate moves (HMRC interest rates).

Paying before probate. Banks and building societies in the Direct Payment Scheme can pay tax straight from the deceased's accounts. Tax on land and buildings, controlling shareholdings, some unlisted shares and property qualifying for Business or Agricultural Relief can be paid in 10 yearly instalments (IHTA 1984 s.227; GOV.UK).

Supporting forms. Business Relief is claimed on schedule IHT413 and Agricultural Relief on IHT414; gifts are listed on IHT403, the residence band on IHT435 and transferred bands on IHT402 and IHT436. Most estates owe no tax and are excepted estates, which report estimated values with the probate application instead (GOV.UK). An estate of a person living permanently outside the UK can be excepted if their UK assets are no more than £150,000.

14. Related calculators and guides

• Inheritance Tax calculator - the 2026/27 bands, taper and charity rate for one estate.
• BPR / APR allowance calculator (April 2026) - the 50% relief above the allowance and a transferred allowance.
• Pension IHT calculator (April 2027) - unused pension funds inside the estate.
• RNRB calculator - the residence band, its taper and a transferred band.
• IHT couple calculator - both spouses' bands together.
• IHT gift taper calculator - taper on a lifetime gift.
• 7-year gift rule guide - gifts, exemptions and trust gifts in more detail.
• Probate and IHT400 process - the executor's steps.
• Capital Gains Tax calculator - a lifetime gift of an asset can also be a disposal for CGT.
• Business Asset Disposal Relief guide - the CGT relief on selling a business.
• UK landlord tax guide - tax on rental property.
• UK residence (SRT) guide - the residence test behind long-term UK residence.
• Pension tax relief guide - contributions and relief.